When you go shopping for a car, it can be a really great experience. But prior to heading out to take your dream car for a ride, it’s a good idea to take the time to determine what your budget is and how much can you afford to be paying monthly.
There are a number of factors that determine what you can swing as a payment, and that should go into your decision-making process. You want to find a balance between what you expect from your vehicle and its price. For example, you need a larger car that’s less than 5 years old and fits your budget.
Your down payment affects the size of your monthly payments. The bigger your down payment, the less you finance, the smaller your car payment will be. In addition, your interest rate decreases when your down payment goes up. There are situations where, in order to get a lower interest rate, a down payment of 20% or more is required.
Your budget should be your starting point
First, you must figure out how much you can afford to pay for your car. You begin with your current monthly budget. According to most financial advisors, your debts, which include your rent/mortgage, car payment, credit cards, personal loans, etc., should not exceed 36% of your gross income, which is your income before deductions and taxes. Experts say the maximum that you should spend on your rent/mortgage is 28%. That means that if you are spending 28% of your income on a mortgage, that leaves you only 8% to balance your debts – that includes your vehicle payment. If you spend less on rent/mortgage, you will be able to spend more on a car.
Determine your monthly payment range
As a buyer, it’s a mistake to seek out a vehicle at the high end of your price range. On paper, the numbers might look good and affordable, but in reality it would stretch your budget to its limits. This could leave you stressed, with very little wiggle room for any unexpected expenses that tend to pop up in life. When you are determining exactly what you can swing for your car payment per month, remember that several factors will affect this.
As we already mentioned, the amount of your down payment will directly affect the amount you finance and hence the size of your down payment. With a very low down payment, interest rates tend to increase, which means you will pay more over the loan’s duration.
The term of your loan will determine how long you will be making payments for it. The length of your term can also affect your monthly payment. Generally, the longer your car loan’s term, the more you will pay in total, because you will be paying more interest. When you have a shorter term loan, the amount of interest you pay will be less, but your monthly payment will actually be larger because you are paying it off faster.
There are additional costs to consider
Aside from the sticker price of the car you are looking to buy, keep in mind the additional costs, such as the registration fees, insurance, and sales tax. These increase your up-front, out-of-pocket expenses. How much you spend depends on the sales tax rate. You can call in advance and ask about these costs. You might be able to include taxes and fees in your financing, but of course this will increase the payment, because it increases the amount you are borrowing.
Insurance is another cost that you will have to consider. Naturally, it isn’t a part of your loan, but it is an annual payment that can often be paid monthly. Insurance varies depending on the vehicle. Different vehicles have different costs that are dependent on the make, model, age, mileage, type of vehicle, coverage purchased, etc. Your insurance company will be able to give you an estimate of what the insurance costs will be for the vehicle you have in mind.
Start shopping for a car by first asking yourself what you can afford. Take some time to learn more about the car you are looking to buy. That will help you make a responsible purchase. Before you even get to the dealership, you will know what you want to spend, how you want to finance, and all the other details.